The core question at the heart of the U.S. Department of Justice’s case against Tornado Cash developer Roman Storm is whether he created software or controlled a service.
Storm’s attorneys sparred with prosecutors Friday during a three-hour-long hearing on his motion to dismiss the government’s case against him, with Judge Katherine Polk Failla of the Southern District of New York questioning both teams about their arguments on this central question.
The DOJ charged Storm – and fellow developer Roman Semenov – with conspiring to commit money laundering, conspiring to operate an unlicensed money transmitting business and conspiring to violate the International Economic Emergency Powers Act (in other words, conspiring to violate sanctions regulations) last August. Storm pleaded not guilty to the charges and moved to dismiss the case against him in March.
Among the DOJ’s charges are allegations that Storm and his fellow developers knew that the Democratic People’s Republic of Korea (DPRK) and other malicious actors were laundering funds through the mixer, which prosecutors described as a business offering a service. The defense has argued that Storm merely developed privacy software for financial transactions that he released to the world for anyone to use.
In Friday’s hearing, defense attorney Brian Klein, of Waymaker LLP, argued that Storm had no control of Tornado Cash after May 2020 – the time period in which the DOJ alleged Storm broke the law through his operating the decentralized mixer.
Keri Axel, also of Waymaker, added that Tornado Cash’s user interface did not in itself control the transactions that users sent around.
“They’re not connected to those transactions,” she said, later adding, “I don’t think we’re anywhere close to wilfully providing service to the DPRK.”
This was a theme during the hearing, with the defense repeatedly emphasizing that Storm didn’t have control of Tornado Cash’s pools, which were immutable, and therefore Storm couldn’t be criminally liable for how people used the mixer.
“This is the only [money laundering] case ever where the defendant didn’t have control over the funds. Period,” he said.
Liability and control
Prosecutor Thane Rehn argued that “any legitimate business” that becomes aware of criminal activity is required to take steps to stop it.
“That’s a lot. I’m not sure what you expected Mr. Storm and his colleagues to do. Should they have shut down Tornado Cash?” Failla asked the prosecution. “How do you saddle him with liability?”
Failla mused on what the tipping point, as she called it, should be for when a service should shut down when it becomes aware that criminals are using it in the process of bad actions
Rehn said “a single transaction” has been known to be enough evidence – Storm, sitting at the defense table, shook his head at this.
If Storm didn’t make a profit, would he have been prosecuted, the judge asked.
No, prosecutors said, there would still be a case: “We could imagine a philanthropic money launderer.”
WhatsApp hypothetical
As Failla considered arguments about whether Storm could be held criminally liable for activity on the software he helped to create, she asked prosecutors whether another software used by criminals – encrypted messaging application WhatsApp – could similarly be blamed for what users did with its technology.
Because WhatsApp is encrypted, it “must know” that one of its major selling points is that criminals can use it without their communications being spied on.
“I don’t see you charging WhatsApp,” Failla said, asking prosecutors what the difference is between the two softwares that makes one liable for criminal activity and another not.
The encryption, Rehn said, means that WhatsApp doesn’t have specific knowledge about what’s happening and can’t separate the wheat from the chaff – the criminal from the non-criminal activity.
Failla countered, asking Rehn whether that would change if the Attorney General were to write to WhatsApp, informing them that criminals were using it to evade law enforcement – surely then, she asked, WhatsApp would be “on notice”?
Rehn ultimately argued that activity on WhatsApp – communication – is protected by the First Amendment, whereas it is “certainly constitutional” for the government to make certain requirements of financial institutions.
Document production
The first half of the hearing focused on two other defense motions: a motion to compel the DOJ to produce evidence from other U.S. government agencies and foreign governments, and a motion to suppress the DOJ from seizing certain cryptocurrencies.
The defense wanted the DOJ to produce documents tied to mutual legal assistance in criminal matters treaties (MLAT) from the Dutch government, which recently prosecuted a third Tornado Cash developer, Alexey Pertsev. The defense also wanted the DOJ to ask the U.S. Treasury Department’s Office of Foreign Asset Control (OFAC) and Financial Crimes Enforcement Network (FinCEN) to produce any material they might have.
Klein said the standard for the MLAT material is if the defense has a “strong sense” that the material may be helpful, conceding that the team did not necessarily know if the communications would be relevant.
“It doesn’t have to be an actual exhibit, just something that can help us uncover [further evidence],” he said.
The DOJ argued that communications with a foreign government might have diplomatic sensitivities, and couldn’t be shared.
“The defense’s request is entirely speculative,” said prosecutor Ben Arad.
Klein said he would be happy with redacted documents that omitted any of the diplomatic concerns. He also asked the judge if she could review the materials herself if she was inclined to refuse the defense request.
The DOJ similarly pushed back against the request to have OFAC and FinCEN turn over any materials, saying those agencies are not part of the prosecution.
The judge also seemed skeptical of the defense argument, saying the request seemed to want her to order an end-round against existing case law, which protects agencies not part of prosecutions.
Klein said the DOJ had already turned over a FinCEN report, which he said was tied to the request.
The judge did not make any decisions on Friday, saying she would rule “promptly” on the various motions. She also pushed Storm’s trial, currently scheduled for September, to Dec. 2. Rehn said he anticipated a roughly two-week trial.
While Judge Failla did not indicate how she would rule, she seemed open to arguments from both parties.
“You might look at this and say it’s a very noble message. I might look at it and say it’s a haven for criminals,” Failla said. “And we’d both be right.”
